What's at Stake
A reasonable royalty is often determined in a patent litigation on the basis of a hypothetical negotiation occurring between
the parties at the time that infringement began. The 25 Percent Rule is a tool used to help calculate the reasonable royalty
during this hypothetical negotiation. Other tools include an analysis of the fifteen factors set forth in the seminal Georgia-Pacific case and an Analytical Method. The fifteen factors set out in Georgia-Pacific Corp. v. U.S. Plywood Corp. are evidentiary facts relevant to reasonable royalty determinations compiled from earlier patent cases. The Analytical Method
calculates a royalty based on the extra profits that were earned by the infringer as a result of the infringement.
In patent litigation, many damages experts came to use the 25 Percent Rule to support a royalty rate that had been determined
based on the Georgia-Pacificfactors or used the 25 Percent Rule as the starting point for a reasonable royalty analysis. When used as a starting point,
a royalty rate based on 25 percent of the expected profit was then adjusted upwardly or downwardly depending upon other factors
in the case. The 25 Percent Rule tended to give some predictability to the determination of patent infringement damages since
a significant deviation from the 25 Percent Rule usually required justification to be acceptable to the judge or to the jury.
In the Uniloc decision, the panel of the Federal Circuit recognized that the 25 Percent Rule had been "passively tolerated" in past cases,
but indicated that "[t]he admissibility of the bare 25 Percent Rule had never been squarely presented to [the] court." After
considering various Supreme Court precedent, the Uniloc panel stated that "as a matter of Federal Circuit law … the 25 Percent Rule of thumb is a fundamentally flawed tool for determining
a baseline royalty rate in a hypothetical negotiation … because it fails to tie a reasonable royalty base to the facts of
the case at issue."
What's it Mean?
In the wake of the Uniloc decision, patent damage experts will be without the 25 Percent Rule as a starting point or general frame of reference for
the hypothetical negotiation. Therefore, from a quantitative perspective, royalties received by the patentee for the licensing
of the patent-in-suit (Georgia-Pacific factor 1) and the rates paid by the licensee for the use of other patents comparable to the patent-in-suit (Georgia-Pacific factor 2) will be increasingly more important in determining the reasonable royalty rate during the hypothetical negotiation.
While litigants in the pharmaceutical and biotechnology industries are less likely than those in some other technology areas
to have an absence of market comparable royalties, such litigants need to understand that, in two of the prior Federal Circuit
decisions in this series of cases tightening the standards for establishing patent damages, the court has highly scrutinized
the licenses used for purposes of setting the appropriate royalty rate.
The decision in the Uniloc case underscores the importance of tying damages calculations to the facts and circumstances of the particular case and continues
a trend in recent Federal Circuit decisions towards the gatekeeper role of district court judges in handling damages. Thus,
from the perspective of the pharmaceutical and biotechnology industries, this trend will hopefully negate the need for any
significant legislative patent damages reform.
Susan M. Dadio, a Shareholder at Buchanan, Ingersoll & Rooney, PC, is the IP Biotechnology Practice Group Leader. She can be reached at firstname.lastname@example.org
Russell L. Parr, President of IPRA, is an expert in determining the value of intellectual property, and publishes three royalty rate resource
books about the economic aspects of IP transactions. He can be reached at email@example.com